Jay Adair - CEO Will Franklin - EVP Jeff Liaw - CFO.

Ben Bienvenu - Stephens and Company Ryan Brinkman - JP Morgan Matthew Paige - Gabelli & Company Bret Jordan - Jefferies Elizabeth Suzuki - Bank of America Gary Prestopino - Barrington Research.

Good day everyone and welcome to the Copart Incorporated second quarter fiscal 2017 earnings call. Just a reminder, today’s conference is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Jay Adair, Chief Executive Officer of Copart Incorporated. Please go ahead, sir..

Thank you, Shintel. Good morning, everyone and welcome to the second quarter earnings call for Copart. With me in the room is Will Franklin, our Executive Vice President and Jeff Liaw, our Chief Financial Officer. I’m going to turn it over to Jeff for Safe Harbor and financial review.

Will give an update on the company and then we’ll be happy to answer any questions after that.

With that, Jeff?.

Thank you, Jay. I’ll start with the Safe Harbor.

During today’s call, we’ll discuss certain non-GAAP measures including non-GAAP net income per diluted share, which includes adjustments to reverse the effect of foreign currency related gains and losses on our cash balances and the adoption of an accounting pronouncement regarding the tax treatment of executive stock option exercises.

We’ve provided a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures on our website under the Investor Relations’ link and in our press release issued yesterday.

We believe the presentation of these non-GAAP measures together with our corresponding GAAP measures is relevant in assessing Copart’s business trends and financial performance. We analyze our results on both GAAP and non-GAAP basis described above.

In addition, this call contains forward-looking statements within the meaning of federal securities laws, which are subject to substantial risks and uncertainties that could cause actual results to differ materially from those projected or implied by our statements and comments.

For a more complete discussion of the risks that could affect our business, please review the management’s discussion and analysis portions in our related periodic reports filed with the SEC. We do not undertake to update any forward-looking statements that may be made from time-to-time on our behalf. Now to the second quarter.

We continue to base the presentation, consistent with what we showed you for the first quarter with non-GAAP net income adjusted to exclude the effect of foreign currency related gains and losses on cash balances as well as the adoption of accounting pronouncement regarding the tax treatment of stock option exercises.

For the cleanest look at the business, we continue to encourage you to focus on revenue, gross profits and operating income measures. I’ll describe in greater detail the currency fluctuations, which affected other income and then in turn net income on a GAAP basis.

Starting with the top line, we experience global revenue growth of approximately 17% year-over-year for the second quarter from just under $300 million to just under $350 million in the current quarter. We did experience a detrimental year-over-year currency effect on revenue of approximately $9.5 million.

This is due of course primarily to weakness in the British pound relative to the dollar. The pound for the quarter was down 17% year-over-year. We did experience global unit sales growth of 18%, consistent across the United States and as well as our international segment.

US unit growth was driven by combination of factors, principally growth through our existing insurance customers due to driving activity in total loss frequency, consistent with themes we've discussed with you in the past as well as account wins and catastrophic weather events.

Approximately 3% of our growth was attributable to cat events in the second quarter or for units sold in the second quarter of ’17 in comparison to the second quarter of ‘16. We grew global inventory at 17.7% year-over-year, a modest portion of this between 1% and 2% is attributable to catastrophic weather events as well.

Service revenue growth of 19.1% in comparison to purchase card revenue growth of just $0.2 million is 0.5%, a continuation of the theme we described to you in the past regarding our proactive shift of units away from purchase arrangements to service arrangements when we can so do.

We grew gross profit from 124.6 million in the second quarter last year to 146.8 million this year with a slight increase in gross margin from 41.6% to 42%. A few notes on average selling prices. ASPs were up slightly year-over-year for the second quarter, a function really of a few different things.

First is, we did experience year-over-year scrap increases of just shy of 40%. That we cite American recyclers crushed car body index averaging their index across the five regions. The improvement in scrap rates was offset of course by a much stronger United States dollar, which all else equal can reduce selling prices for cars in our US auctions.

For example, the USD was nearly 20% stronger this year in this quarter than it was a year ago. Used car value is not a particular driver of change in the quarter. Mannheim’s index indicates plus or minus flat used car values for the two periods.

We did experience an increase in general and administrative expenditures of just over 3 million, $3.3 million ex-D&A. Also, the G&A was down sequentially versus the prior quarter. We incurred certain adjustments for certain indirect tax expenses, also experienced some modest increases in professional services expenses.

Regarding D&A within the general and administrative expenditures, our increases were due primarily due to assets in information technologies that were placed into service as well as changes to certain useful lives for our technology.

As we continue to say, G&A will continue to grow on an absolute dollar basis as the size of our business, the complexity of our business increases over time, though with reasonable top line growth rates, we expect to continue to achieve operating leverage.

We experienced EBIT growth of just over 18%, growing from $92.1 million for the second quarter last year to $108.9 million this year. That’s despite a currency related drag of approximately $2.9 million for the quarter due again to weakness in the British pound.

Our net interest expense for the quarter was up slightly from 5 million to 5.8 million due to a higher funded debt balance offset by somewhat lower drawn rates. The other income line includes a loss of $3 million, largely due to currency fluctuations on our cash balances.

A year ago, other income was a positive $4.4 million also due to the same currency fluctuations. GAAP net income for the period grew at 12% from 59 million to 66.1 million. Non-GAAP net income, which I will walk you through in a little bit greater detail, grew from 55.5 million to 67.4 million this year, growth of 21.6%.

The non-GAAP net income excludes after-tax foreign currency related losses of 2.7 million in this current quarter and reverses as well the prior year gain of 3.5 million. So that line item alone is a $6 million unfavorable swing, which is adjusted for in our non-GAAP net income.

Our non-GAAP net income also excludes the book tax effects of our adoption of ASU 2016-09 regarding the GAAP tax treatment of stock option exercises. Our year-over-year share count has decreased due largely to share buybacks, including the effective share buybacks from tax withholdings for executive option exercises.

On balance then, our non-GAAP EPS grew at 29% year-over-year for the second quarter. Let's turn our attention to the balance sheet as well as the cash flow statement. A few highlights on cash flow.

Operating cash flow for the quarter was $81 million, a function of increased EBIT, offset by AR growth with accounts receivable consuming $45 million of cash. You know already that the accounts receivables are primarily advanced charges paid out on behalf of our customers when a lot is picked up.

So our accounts receivable tends to grow with the inventory that we have in our yards. We did experience a $32 million reduction in deferred and current income taxes.

You may remember from the prior call that we incurred a large tax bill in effect regarding the stock option exercises by our executives, which effectively prepaid the majority of our federal income taxes for this fiscal year. This $32 million reduction is that cash benefits coming to fruition in the second quarter.

The second quarter, as you know, is customarily the quarter in which we build inventory, which was the case again this year. Our capital expenditures for the quarter were $54 million, of which approximately 80% is for land development and lease buyouts.

Our diluted shares outstanding again decreased from a little north of 124 million to 117.8 million due largely to share buybacks, including open market purchases as well as the effective buybacks for tax withholdings. With that, I'll turn it over to our Executive Vice President, Will Franklin..

Thank you, Jeff. I’d like to add a few more brief comments and we'll turn it over for Q&A. The story for the quarter for both North America and the UK is a continuation of the growth in volume, driven by market wins, by organic growth within the market and by expansion of our non-insurance businesses.

In North America, sales volume was up 18.4% over the same quarter last year and 34% over the same quarter two years ago. In the UK, we have similar trends, with volume up 15.4% and 27.5% over the same quarters of fiscal ’16 and fiscal ‘15.

In both North America and the UK, drivers of organic growth are the same and consistent with prior discussions that we've had in this call. We are seeing increases in the car park, increases in acts of frequency and of most importance, increases in salvage frequency.

In North America, revenue grew 20.5%, which outpaced volume growth as revenue per car increased marginally due to higher ASPs and the performance of additional services. While non-insurance volume grew, as a percentage of total volume, it declined from 19.8% to 17.8%. Growth in non-insurance volume came primarily from additional dealer cars.

Accommodating the tremendous growth in North America volume, while at the same time ensuring that we continue to provide the best service to our sellers and our members has presented opportunities to our operations and our facilities teams. Our facilities teams have been successful in obtaining additional capacity in very difficult environments.

Over the course of the last few years, we have noted the increasing difficulty and the increase in expense of attaining new storage capacity. In the US, during the 4.5 year period ending Q2 of 2016, we opened only three Greenfield yards. In the last four quarters alone, we have announced and opened 10 new Greenfield yards.

In addition, we have opened 10 sub-lots and expanded 16 existing facilities. During the current quarter alone, we opened five yards, six sublots and expanded five existing locations, increasing capacity by 463 acres.

Even with these additions and expansions, we will need more land to address the expected future growth and to be better prepared to address the sudden storage demands created by catastrophes. Last week, we opened a 162 acre site in [indiscernible], Florida.

This site will not be operated as a standalone yard at this time, but will serve as standby storage capacity, ready for immediate access should a cat occur in the Miami, Tampa, or Orlando, Florida areas.

A similar strategy has been implemented in North Florida, Louisiana, Georgia and North and South Carolina and has been rolled out in other cat regions. In the UK and expressed in pounds, our revenue was up 15.5%, very consistent with UK volume growth. In addition to growth in the insurance market, the non-insurance volume increased by over 36%.

And as a percentage of total volume, non-insurance cars grew from 15.4% to 18.2%. However, the change in the pound to USD exchange rate has a severe impact on UK revenue of over $10 million and resulted in a recognized decline in UK revenue expressed in dollars of 3.5%.

Overall, our growth of revenue of 16.6% was slightly below our growth in volume of 18.3%, primarily due to the detrimental quarter-over-quarter change in the foreign currency exchange rates. At the end of the quarter, our North America and our UK inventories were up 19.1% and 4.1% respectively. Global inventory was up 17.7%.

On a consolidated basis, our average cost to process each car increased marginally over the same quarter last year. In normal environments, increased volume yields reductions in average cost to process a car due to greater fixed cost absorption.

However, in the current environment, new volume was frequently addressed with new capacity, not idle existing capacity. Further, we incurred extraordinary operating costs associated with temporary leases, additional trucking to move cars between locations after hours and with staffing that was well in excess of our normal operating models.

We remain focused on G&A expense and are pleased with our efforts to gain leverage by controlling this growth. While we saw a spike this quarter, a result of primarily from unique expenses and we expect G&A expense to continue to decline as a percentage of revenue. Now, let me conclude with a final comment.

In a business the nature of Copart, in which land very specific in nature and very difficult to find, is required and where scale is achieved through the construction of new facilities that can take 12 to 24 months, it's very difficult to maintain operational leverage with worldwide growth volume of 33.6% over the last two years and 18.3% over the last 12 months.

Yet, in this environment, we expanded our EBIT margin by 210 basis points over Q2 of ’15 and 50 bps over Q2 of ‘16. And we expect to see better operational leverage as we begin to complete our facilities expansion and to process volume growth through the excess capacity that we are currently creating. That concludes my comments.

Shintel, we’ll turn the call over to you to manage the Q&A portion of it..

[Operator Instructions] Our first question will come from Bob Labick, CJS Securities..

Good afternoon. This is actually Robert in for Bob today.

Can you update us on capacity additions as how many acres you’ve added and how many more are to come?.

Yeah. It depends on what period you’re talking about. We have on our board over 60 expansion targets that we're looking at and that's worldwide. And it's impossible to predict exactly the number of acres that those efforts will yield or the timing of those efforts, because like I said in my remarks, it's very difficult to get a contract on new land.

I would expect to be in the high hundreds of acres within the next 24 months..

That's helpful.

And are you able to quantify cat cost in the quarter?.

No, not specifically. We still did have remaining cat costs, we did process between 8000 and 10000 cat cars during the quarter. But the cat wasn’t the sold driver of the increase in costs. It was just the overall volume that affects at almost every yard..

Got it. And can you provide any update on Germany and Spain, with auctions taking place there I guess really today.

What are you learning there?.

Yeah. So the auctions are test in nature and the results have been very promising. The auctions are yielding returns that are much higher than the current process employed. What we’re also understanding is that we need to have a broader footprint in yards to be able to offer this to the insurance companies in Germany.

And so we’re somewhat subject to the pace of the expansion of those yards. Currently, we have seven yards that we’re targeting to open, one which has already been opened. That's at Homburg. We have four other yards that we’re negotiated contracts on and the two that we're still addressing the zoning issues.

So like I said, the roll out in Germany is somewhat subject to our ability to open those yards..

Thank you. That’s very helpful. And just lastly from me.

Typically, how long does it take for new yards to reach mature margins?.

There's no one any one yard that’s -- they're all different. They're all snowflakes. It depends on how much deposit you can shift from other yards. They can be as short as a year and it can be as long as three or four years..

Thank you very much. Our next question will come from Ben Bienvenu from Stephens and Company..

Thanks. Good afternoon. I'm curious, you highlighted some of the FX headwinds on the revenue from a translational perspective. Are you -- your volume growth and inventory builds continue to be really strong.

I'm curious are you seeing any implications or dampened appetite from a strong dollar from your foreign buyers’ appetite to buy vehicles at auctions?.

So Ben, I think what I heard you, as it probably relates to relatively unconnected concepts. The first is that we continue to experience meaningful inventory growth and volume growth and that's a reflection of the factors we've talked about really for a while now regarding driving activity, accident rates and total loss frequency.

That appears to be continuing unabated as far as we can tell. The second question you raised, which is the foreign currency effect on our foreign buyers. I mentioned that in my comments as well. That certainly affect the average selling prices for our vehicles. On balance, we’re still flat or up slightly year-over-year.

There are a handful of things to go into that -- that contribute to the question of ASPs, of which foreign currency is one. The others are scrap, used car values, mix, et cetera. But all else equal, certainly, the US dollar being 20% stronger year-over-year versus the Mexican peso for the second quarter does affect ASPs..

Okay. Thanks. And then you highlighted your recent capacity additions in cat prone geographies. We've seen more flooding in California.

I'm curious how has the additional capacity that you've brought online better positioned you in those markets and can you give us any sense of what kind of volume is being generated as a function of some of the recent flooding activity we’ve seen in our West?.

No. In respect to the last question, we really can't give you any kind of guidance on the volume that we’ll generate. We have opened up two new yards in Southern California, which I don't know what we do without those. We also have sublots in the high desert area.

So when I talked about the additional cost, what we’ll do is we’ll use some of the yards in Southern California as marshalling yards.

We’ll bring the cars in during the day and during the night, we’ll load those up on car haulers and we’ll take them up to our sublots, up in Palmdale which once again significantly as to the cost of processing the cars..

Thank you. Our next question will come from Ryan Brinkman, JP Morgan..

Hi, great. Thanks for taking my question. Can you please remind us of the drivers of the seasonal leverage of yard and expense cost as a percentage of revenue as we walk you’re your fiscal second to fiscal third quarter. The last couple of years, you appeared to have leverage these expenses, 13 bps, 300 bps, maybe.

Should we expect that type of leverage to repeat this year, benefiting margin again?.

Ryan, as a general matter, we don’t provide forward guidance, but let me provide what I think could be relevant color. So when we received a unit, we incur the majority of the expenses. We however don't recognize most of the revenue until we sell it.

So depending on whether the receipt of a given unit crosses - receipt and sale of that unit crosses the reporting period that can cause us to incur the expenses upfront and not recognize the revenue - most of the revenue until later. This is all a function of course of GAAP guidelines.

And so in a period like the second quarter in which we received many more units than we sell. We have borne a substantial portion of the costs already for which the units will be sold later. That can explain some of the seasonal fluctuations in our gross margin rate..

And then just when you talk about insurance versus non-insurance cars.

You're not really talking about salvage versus whole car right, because I think a large portion of your non-insurance cars are actually like non-insured salvage cars picked up from junkyards is that the case and I ask because I've gotten some questions today about how you might be negatively impacted by some of the headwinds that car auction service has discussed regarding if you are dealer consignment sales on the whole car side.

And I didn't think you had much exposure there.

Are you able to say how large cope our dealer service is now as a percent of your total business?.

Now I don't really want to express as a percentage but I will tell you that most of our non-insurance cars are truly non-insurance cars. They're not salvage cars that came to us through an owner retain process..

So there is some fair amount of exposure there?.

Tell me what you mean by exposure?.

I don’t know, 10% of your unit volume, I don't know..

I’m going to jump in, because are you – I want to make sure I understand the question or we understand the question Are you stating that they are referring to dealer auctions as having slower dealer consignments..

That's right on the whole car side there's fewer dealer consignment sales and I was just wondering is there in - well some clients are on it.

Is there implication for your volume from that, how to think about, I think it's small, how to think about the magnitude of your exposure to whole cars being sold by dealers because I know you had that co-part dealer services business you launched a while back?.

We won't provide a percentage. We will tell you this that in the last three quarters that number has been growing..

Growing? Okay so maybe that's one of the reasons [indiscernible]. Just last question on the opportunity to repatriate cash back to the US if tax laws really change.

Is that material enough of an opportunity to drive any different capital allocation decision or would you even look to because you need to invest organically in Germany or pursue other inorganic growth overseas?.

Hey Ryan, Jay here. The guys can answer that question. I just want to jump in on this point that you're making about the consignment.

They are two very different types of cars and we've got a dealer consignment in the whole car and a lot of those vehicles are coming from franchise dealerships and we've got a dealer consignment in our world, most of those are coming from non-franchise dealerships.

So they're really not comparative cars and then to Will's point, besides the fact that that segment is growing to Will's point all non-insurance then we start to look at institutions and charities and other companies that assign products and they have absolutely nothing to do with trade ins or insurance..

And Ryan to your next question then about cash repatriation. As you know the majority of our cash is actually held in non-US accounts. Our expectations are to invest and deploy that capital outside the US. If there is a substantial change to the tax code here in the US, we of course would reevaluate and consider those parameters as well..

Our next question will come from Matthew Paige, Gabelli & Company..

As you speak about gaining additional capacity, in the past you've mentioned also moving into adjacent markets as potential areas of interest, is it still the case and where does that fit on your list of priorities?.

And what do you mean by adjacent?.

Like equipment, equipment options or even in more car auction?.

The investments you've heard us talk about today are for our core business hard stop as for considering our strength and strategic capabilities and whether they would enable us to extend our franchise into other spaces that's something we consider over the long term, but nothing you've heard us talk about today is relevant for that consideration..

Let me just add to that, we keep waiting or expecting this trend of growth to subside in salvage cars and I just get the most recent numbers from ISS, Independent Statistical Service, which is a information provider to mostly insurance industry. In the last quarter they provided information which was third quarter of last year.

Salvage frequency actually went up, we've been expecting that to go down. In terms of total claims, on a year over year basis up 3.5% but in total paid losses it was up 10%. And if you look back 24 months, claims were up 8%, the total paid losses was up 20%. And that's kind of the basis for the increase in the salvage frequency.

The cost of repair is growing, accident frequency is growing and so we're very comfortable with our expansion process as needed to address this expected volume..

And my second question it for Jeff; you’re now been with the company for a little over a year. Has there anything that surprised you or [indiscernible]..

I think of course before you join a company you just understand so much less about it and what I was able to see from the outside of course respected and admired from afar and now that I'm plugged in and appreciate the complexity of the business and how hard it is to manage the network of facilities, the buyers while providing outstanding service to sellers including in cash often times.

I think I have a better appreciation for just how hard it is to do what we do. But in terms of co-part, no meaningful surprises. I did spend a lot of time with Jay and Will and others before joining the company. So it's been relatively smooth sailing..

Our next question will come from Bret Jordan, Jefferies..

Is there a way to think about capacity utilization I mean obviously you’ve added a fair amount of acreage in the last twelve months and you're adding a fair amount more? And it sounded like maybe your utilization was too high to be efficient previously but is there a way that we should be thinking about this relative to the cycle as well because obviously we're having a pretty strong inflow of volume, is there a point at which you have acreage that would become inefficient if we had a slowed down.

I guess how to do the math around the incremental real estate decision..

Well first off the conversations around expansion aren’t that broad, they’re generally fairly narrow in terms of geographical regions. So we can’t look at our total capacity nationwide. And there's a lot of factors of enter into what our targets are for the capacity that we need.

We’ve even come with a - come up with a - recognized a new phenomenon that is certain yards are actually get less efficient in their size and we get yards at [indiscernible] cars are actually less efficient than the smaller yards, so that’s also part of the consideration.

I think the biggest change that we’ve seen is that previously we tried to operate our yards at 100 or over 100% capacity during the peak season. And now we decided that that’s that creates too much risk for our sellers.

And we changed model to now we're targeting 85% of capacity during the peak season and 70% of capacity in those areas that are subject to cats. And without answering your question specifically because I’m not sure how to, these are the drivers that we look at when we were doing - going through our expansion processes..

And then one question on market share, obviously there was one insurance company that shifted some share to you guys a year ago.

Is anything else changing out there or is there anything in the pipeline as far as major RFP activity as we look out?.

There's always RFP activity in - we compete very aggressively with every other player in the industry. We think we've done very well in the last couple years and it is impossible to predict what the next couple years will look like..

Our next question will come from Elizabeth Suzuki, Bank of America..

Just a question on operating leverage and efficiency here.

Is there a good rule of thumb for the level of ideal revenue growth you would need in order to achieve operating leverage with the capacity you have in place now because it seems like that volume growth is too high you have to add capacity which is costly but obviously if it too low you can’t leverage your fixed costs, so you know what do you think is the sweet spot there for volume growth?.

Without a lot of analytics behind it I would say 8% would be really nice that gives us time to like I said it takes a couple years to get to acquire new capacity that gives us - that would afford us time to do so, especially for operating at 85% capacity based on current volume..

Elizabeth, I’d say that growth is affirmatively good for us and ultimately the more we grow the more we achieve operating leverage over the long term. I think we can create near term noise is surprises or volatility. And if you told me we for sure grow it at 15% a year forever.

We can plan accordingly, hire accordingly, build land accordingly et cetera. Is that there is some natural volatility in any industry including ours that they can create spikes if we suddenly have catastrophic weather events and a really busy summer that can cause over time excess of all expenses et cetera.

If you had perfect visibility which we will never have and robust growth that would of course be ideal..

And then just looking at the potential for tax reform, CAR mentioned today that they think a 1% reduction in the US corporate tax rate would be about $4 million benefit to their net income, have you done any similar sensitivity analysis, obviously there could be a lot of moving parts, interest deducibility and other nuance but just assuming a straight reduction in US corporate rate how much of a benefit do you think that would be for Copart?.

A good question Elizabeth and I think we're not prepared to comment quite as specifically as they did. I would say when we look at the various pillars of the corporate tax reform being contemplated today.

Big picture that affects both your taxable income so the base upon which taxes are calculated as well as the rates, we’re relatively unaffected on the base side of the equation. We have interests but we're relatively unlevered so we're not affected much by interest deducibility considerations.

We do invest capital so to the extent that we are permitted to deduct those expenditures right away that could in fact reduce our base. So I think the base for which taxes are calculated is relatively unaffected. We are substantially US cash tax payers however. So if the rate changes that likely does accrue to our benefit.

And as that crystallizes and becomes more real we'll certainly have more specific things to say about it..

[Operator Instructions] Our next question will come from Gary Prestopino, Barrington Research..

Couple of questions here, in terms of the GAAP tax rate going forward, what should we use, my model I'm looking at from last quarter I think we [indiscernible] something around 36%. It looks like it came in at 34% this quarter. So what kind of number should we be using on a go forward basis..

So setting aside the topic we just talked about right, which is a more radical overhaul to the tax code. I think probably four to six quarters ago we generally expect 35% to 36% effective rates and that's still the right long term starting point..

And then I couldn’t write down fast enough Will, you gave a breakdown of what the global inventory growth was in the UK and US.

Could you just repeat that?.

Sure. Global was 17.7% and then on a regional basis, North America was 19.1% and the UK was 4.1%..

In terms of the temporary standby storage sites that you're putting up, land is land obviously, it’s going to cause you to do that but in terms of capital improvements, putting facilities there, do you have to do a lot there besides maybe just putting a fence around the land and maybe putting some gravel there.

I mean you need to staff it, do you need have a physical building on the site..

We do not and in our strategy we won’t do much to these. So every yard is unique. The question whether we sense it even one that’s subject to discussion. If we don't fancy that means in times of use we need to have security. So then it’s just a math equation of how many times do you think you’ll use it, needs security versus the cost of the fence.

Generally in these temporary locations, they’re not temporary, but the standby locations will put in roads or rock some roads and that's about it. So beyond the cost of the land here's very little capital necessary to put them in a standby state..

And then the last question as it pertains to what you're doing in Germany. My understanding of that cars were basically owner retained in Germany.

So is there prior to doing these auctions and continuing on is there still some time an educational process that you have to do with the insurance companies to get them to understand just what you're doing to get them to want to pool the cars and obviously you've got to get a buyer base as well right?.

We have a buyer base. And now I don't think there's really any educational process yet to take place. I think that they are aware of the value that we provide and I think they're anxious to be able to utilize that value.

The whole back is moving one region in the country - one area of the country which is not attractive to the larger insurance companies. This is a complete change occurred onto them and a change of process, they'd rather not have two processes ongoing at one time.

And therefore there they'd like to see our ability to handle their volume more broadly within the country..

Our next question will come from Bret Jordan, Jefferies..

Well this is just a follow up to your ISS data.

If you could throw that out again the salvage frequency versus total claims and I guess, is ISS using the similar data that CCC uses from an industry standpoint as they report repairable claims growth?.

I believe it is and this doesn't provide salvage frequency, it provides the drivers to that decision. And so this is more focused on the accident frequency. So the numbers I cited were that the number of paid claims on a year over year basis and this is based on the third quarter of last calendar year, we’re up 3.5%.

And on a two year period we're up almost 8%. While at the same time, the paid losses were up 10 and 20%. And I guess I’d note that accident frequency was [indiscernible] first time, I only go back to 2011, it’s never been 6%.

So the accident avoidance systems and some of the new technologies isn't being demonstrated in the numbers at least at this point..

Smartphones are beating accident avoidance technology. So this takeaway here is claims, the percentage of claims that are losses are increasing as a percentage of crashes..

That's correct..

At this time we have no further questions in the queue..

I would just add some closing remarks from listening to some of the questions. One is that you may want to look into the use of adapter headlights and the multiple component bumpers today that exist in the market.

There's plenty of research out there that you can find named off CCC and some of the other sources that are out there but there's no doubt that bumper covers being three components and now being 15 components and all the complexity in headlights. Headlights are now as high as $5000 for a headlight coming from the days when they were less than $100.

So we're seeing some big increases there. You may want to research on some of the carriers as well because they're reporting that in their claims costs and why their claims costs are up because of that. That increase in cost is increasing severity and that's severity going up causes total loss frequency or salvage frequency as we call it to go up.

The other thing that I'm not sure that the analyst maybe understand it, but not positively you fully understand it is this cost that we have associated with building yards and asking questions about what would be normal.

Right now we've got people in advance of all this growth that are finding locations developing locations and it takes a number of resources to do that and then once those yards already we've got a staff and turn them on completely before we ever assign one car.

And so you've got all this cost when you go from adding I think Will stated three locations over four years to ten locations this year and we believe we’ll open up in addition in the calendar year we’re in another plus ten or more.

So there's a lot of costs that’s associated with that and then once we start to see some normalcy in total loss frequency and the total losses that are coming in, those yards will have access capacity.

So we don't build those yards for 85% capacity, we'll build those yards for 30% or 40% utilization and a much higher number of capacity so they have room to grow into that. As Will stated we want to operate the company at 85% on average for our location.

So these new stores are being built, these new yards are being built with significantly more capacity than that.

And so that you're going to see some of these costs and then finally I would just mention in additional that was the towing component that Will outlined, it could be a pretty significant component when you're out of space in a market, you may have to shuttle cars.

And we've had a few scenarios like that and we're okay with that that we're handling those cars, we’re moving them to areas where we have room and then we expand all that cost goes away.

So we look at all of this as upside, we're getting a lot of volume in the history of my career I've not seen where the volume increases like this and then goes the other direction.

So at some point this may start to shrink, as Jeff stated we don't see that currently but at the point that we start to see volume normalize we don't think it goes into a negative situation. So we slow down at that point, the adding of yards, we slow down the expansion of facilities and we process those vehicles as incremental units.

So that was it, just want to add that color and thank you all for attending the call and we look forward to reporting third quarter. Thank you very much..

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great rest of your day..